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Tax Planning for Families and Individuals in Canada

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The main objective of income tax planning for individuals as well as families is to plan one’s finances in the most tax-optimized manner.

Many Canadians do not give much thought to how they can reduce their taxes until it’s time to file their tax returns each spring. By then, many tax-saving opportunities for the year may be lost. Filing your tax return is essentially once-a-year accounting to the government to settle up your taxes owing or refund due for the previous year —it is the tax planning steps that you take throughout each year that can save the most money at tax time and in the years to come.

Tax planning for individuals and families is an ongoing process to reduce the overall taxes owed by the family. It is usually the cumulative result of different tax planning strategies. The following tax planning techniques should be considered in consultation with experienced Canadian tax accountants:

1. Registered Retirement Savings Plan (RRSP) Contributions

Contributing to your Registered Retirement Savings Plan (RRSP) is a great way to invest, save for retirement and earn some tax savings along the way. You can make continued cash contributions to your RRSP or build an investment portfolio with the money that you contribute. Investment options include Guaranteed Investment Certificates (GICs), mutual funds, real estate investment trusts, and exchange-traded funds. You can put funds to your RRSP up to the allowable limit determined by the unused contributions from the previous year and your income earned in the current year.

2. Income Splitting

A Canadian taxpayer’s income tax bracket and therefore the income tax liability depends on the absolute amount of the taxpayer’s income because the higher the income the higher the income tax bracket and the percentage of income tax paid. Income splitting is a tax planning strategy whereby one taxpayer transfers a portion of his/her own income to another taxpayer who is taxed at a lower tax rate. Income splitting is a practice used to reduce the overall tax bracket of a household. 

3. Tax-Free Savings Account (TFSA) Contributions

Contributions to a Tax-Free Savings Account (TFSA) are not tax-deductible, but the income or capital gains earned from any investments in the TFSA are tax-free at withdrawal. A Canadian taxpayer’s Tax-Free Savings Account contribution room depends on the TFSA dollar limit, any unused TFSA contribution room from the previous year, and any withdrawals made from the TFSA in the previous year. This means that if one did not contribute anything for 2021, then in 2022, one can contribute using the unused contribution room from 2021. However, one can only contribute up the allotted contribution room every year. The earnings generated in the account and the increase in its value will not reduce the TFSA contribution room in the following year. But any excessive contribution will be subject to a tax that is equal to 1% of the excess contribution.

4. Registered Education Savings Plan (RESP) Contributions

A Registered Education Savings Plan (RESP) is a registered contract between an individual (the subscriber) and a person or organization (the promoter). In the contract, the subscriber also has to name the beneficiaries who will be entitled to the education assistance funds from the RESP. The general arrangement is that the subscriber makes contributions to the RESP, and income earned in the account is tax-free so long as the money stays in the account before distribution to the beneficiaries. There are no immediate tax savings as RESP contributions cannot be deducted from your income on your T1 income tax and benefit return. In addition, you cannot deduct the interest you paid on money you borrowed to contribute to an RESP. The federal government will also match the contribution of the subscriber, according to the income of the subscriber, up to a maximum of $500 per year, per child. At maturity, when the beneficiaries are enrolled in an educational institution, money will be paid in the form of educational assistance payments to the beneficiaries. Beneficiaries have to include the educational assistance payments (which include the matching contribution from the government) in their income for the year in which they receive them from the promoter. However, they do not have to include the subscriber’s contribution portion of the payment that they receive in their income. The contribution may also be returned to the subscriber tax-free. Contributing to an RESP is a good way to earn tax-free income and save for the tuition costs of dependent children.

5. Tax Shelter Investments

Canadian income tax shelters are always being sold for the current taxation year. Be sure you understand the risks, both business and tax, before making any decision to invest in a tax-sheltered investment or charitable donation gifting arrangement.

4. Canada Child Benefit (CCB) 

You can take advantage of Canada Child Benefit (CCB), which is non-taxable. You can capitalize on the Canada Child Benefit, offered by CRA (Canada Revenue Agency) as a single parent or having shared custody of the child. You must file your income tax return annually with your spouse or common-law partner to claim for it. Amounts are paid to the eligible families by the CRA for children under the age of 18.

Conclusion

Tax planning allows the taxpayer to use various tax exemptions, deductions, and benefits to minimize their tax liability. Thus it is a cumulative result of various income tax planning techniques. All the above-mentioned tax planning techniques should be considered only after consultation with our expert income tax planning tax professionals.

If you need any advice on tax-saving strategies from an expert tax accountant in Toronto, Mississauga, Oakville, and Hamilton feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step towards proper management of your finances.

Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.

Salman Rundhawa
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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